3 profitable businesses, business borrowings but personal cash.

B

Brandy1

Registered User
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Hi
Your age: 42
Your spouse's age: 42

Myself and my husband are currently running 3 different business, 2 as sole traders and one ltd company.

The 2 sole traders have approx profits of cicra €120k a year and the company we take wages of cicra €35k and pensions of €24k combined,

We have just our mortgage with a balance of approx €40k on house worth €500k.

One of the soul traders has a business loan of approx €290k payable over 7 years( paying approx €60k back a year) interest rate of 6.75%. This business has assets of approx value €1.5m

We have life insurances of approx €600k each.

We have savings in standard deposit accounts of €180k varing from .25%-3% interest.

QUESTIONS:
I am a girl still scarred from been a child in the 80s recession and surviving the last crash. I havent quite got over having to split money into envelopes for bills each week to ensure all was paid.

Roll on to today and we are doing quite well, the businesses are all doing ok and all loans and bills are paid on demand and we are saving money each month. I know the sensible thing to do it to use our savings to pay of a massive chunk of the business loan, but i just like the security of having it there should any of the business take a dip etc.

We are maxing our pensions, have college tuition sorted( we have 2 teenagers). I am just thinking if the business can effort to pay the loans than we should just let it, and not touch any of our personal savings unless really needed to.

Am i right?

Opinions please.

Also would love advice on better investments and pensions, maybe a good independent advisor?
 
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Brandy1 said:
One of the soul traders has a business loan of approx €290k payable over 7 years( paying approx €60k back a year) interest rate of 6.75%.
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Brandy1 said:
We have savings in standard deposit accounts of €180k varing from .25%-3% interest.
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Clear the business loan.
You argue that if the business hits a rocky patch, it's handy to have cash available.

But this security blanket is costing you dearly.

€180k @6.75% = €12,000
Probably reduced by €2,000 interest received
So gross cost €10,000
Net cost after tax relief €5,000

The net interest rate is about 3.4% so if you are paying more than that on your mortgage, you should clear down your mortgage first.
 
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You have three different businesses which gives you some diversification.

Of course, a general recession might hit all businesses, but one or two should do ok.
 
Brandy1 said:
the company we take wages of cicra €35k and pensions of €24k combined,
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Have you discussed this with your accountant and tax advisor?

I don't like people saying "we take wages"

You should probably be clearing out the profits in full every year and not leaving the profits subject to Corporation Tax in the company and more tax when you eventually take it out.

But you need a written strategy on this so you can understand it and keep it under review.
 
Brandy1 said:
One of the soul traders has a business loan of approx €290k payable over 7 years( paying approx €60k back a year) interest rate of 6.75%. This business has assets of approx value €1.5m
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That sort of size suggests that you should probably be operating through a limited company.

You should sit down with your accountant and tax advisor and go through the pros and cons.

Could this business become insolvent? If so, the protection of a limited company would be very useful.
 
Brendan Burgess said:
Have you discussed this with your accountant and tax advisor?

I don't like people saying "we take wages"

You should probably be clearing out the profits in full every year and not leaving the profits subject to Corporation Tax in the company and more tax when you eventually take it out.

But you need a written strategy on this so you can understand it and keep it under review.
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The company has profits of circa €100k after pensions and wages, it wouldnt be cost effective to take that out as wages at high rate of tax and than leave it sitting in deposit accounts
 
Brendan Burgess said:
That sort of size suggests that you should probably be operating through a limited company.

You should sit down with your accountant and tax advisor and go through the pros and cons.

Could this business become insolvent? If so, the protection of a limited company would be very useful.
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Due to the nature of both business it isnt advisable to go into limited company at the present moment, the assets held are all in personal names and would be subject to stamp duty, and the loans are in personal names and repaying them from company would mean drawing repayments down as wages again subject to the highest rate of tax
 
Brandy1 said:
it wouldnt be cost effective to take that out as wages at high rate of tax
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If you take it out now, you will pay 50% tax and get 50% into your hand.

If you leave it there, you will pay Corporation Tax on it at 12.5%
Then when you eventually take it out, you will pay 50% tax on the 87.5%
So you will get 43% into your hand.

Take the cash out and repay your personal loans.
 
Brendan Burgess said:
If you take it out now, you will pay 50% tax and get 50% into your hand.

If you leave it there, you will pay Corporation Tax on it at 12.5%
Then when you eventually take it out, you will pay 50% tax on the 87.5%
So you will get 43% into your hand.

Take the cash out and repay your personal loans.
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Not if we leave it and take a termination payment if we decide to close this business. This is a possibility in the future, running three businesses is not easy.
 
Brandy1 said:
Not if we leave it and take a termination payment if we decide to close this business.
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If you have a written tax plan with all this worked out and a definite plan to close the business in the short to medium, then this might be worth it.

But otherwise, just take out the profits and cash.
 
Brendan Burgess said:
If you have a written tax plan with all this worked out and a definite plan to close the business in the short to medium, then this might be worth it.

But otherwise, just take out the profits and cash.
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Yes, I am happy with our tax strategy.

I am just wondering what is best practice in relation to business loans vs personal savings.
 
Brendan Burgess said:
If you have a written tax plan with all this worked out and a definite plan to close the business in the short to medium, then this might be worth it.

But otherwise, just take out the profits and cash.
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Agreed.

It's very rare that there's true justification for retaining notable cash savings, while carrying a more expensive debt.

Do you have the deposit locked away on a fixed rate, for a fixed term?

Variable deposit rates will likely reduce, on the back of the most recent ECB rate reduction.

Most business loan rates won't decrease, so if you've a variable rate deposit, your net cost (to retain the loan) will shortly increase.
 
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